FINANCE 340FINANCE 340

BUSINESS FINANCEBUSINESS FINANCE

MY BACKGROUNDMY BACKGROUND

NAME: Ken ShahNAME: Ken Shah BORN: Bombay, IndiaBORN: Bombay, India PhD:PhD: University of OregonUniversity of Oregon INDUSTRY EXPERIENCE: INDUSTRY EXPERIENCE:

4 yrs trader/broker on Bombay Stock Exchange4 yrs trader/broker on Bombay Stock Exchange 3 yrs quantitative portfolio management research 3 yrs quantitative portfolio management research

in Portland, Oregonin Portland, Oregon

RECENT RESEARCHRECENT RESEARCH

I investigate the choice of mix of debt and I investigate the choice of mix of debt and equity in a firm (called capital structure)equity in a firm (called capital structure)

I investigate why and how companies go I investigate why and how companies go public (IPOs) and how they do afterwardspublic (IPOs) and how they do afterwards

SO THAT I CAN GET TO SO THAT I CAN GET TO KNOW YOU BETTER...KNOW YOU BETTER...

Avoid changing seatsAvoid changing seats Please bring name cards and display EVERY Please bring name cards and display EVERY

class class Drop by my office and introduce yourself!Drop by my office and introduce yourself! Sign and return Honor Code sheet by next Sign and return Honor Code sheet by next

classclass Attach your photo and tell me a bit about Attach your photo and tell me a bit about

yourself on the Honor Code sheetyourself on the Honor Code sheet

COURSE OBJECTIVESCOURSE OBJECTIVES

Learn about Learn about markets and securitesmarkets and securites and and evaluate their risk and return characteristicsevaluate their risk and return characteristics

Learn how to make sensible Learn how to make sensible personalpersonal financial decisionsfinancial decisions

Learn how Learn how investment opportunitiesinvestment opportunities are are evaluated in corporationsevaluated in corporations

Learn to exploit Learn to exploit computers and Internetcomputers and Internet to to your advantage in financeyour advantage in finance

COURSE PREREQUISITESCOURSE PREREQUISITES

ECO 271, ACCT 231; Junior standingECO 271, ACCT 231; Junior standing

I will assume you have an understanding of:I will assume you have an understanding of: Basic AlgebraBasic Algebra Basic StatisticsBasic Statistics Basic computers and InternetBasic computers and Internet Excel spreadsheetExcel spreadsheet

General Nature of CourseGeneral Nature of Course I am not kidding, this class is not going to be I am not kidding, this class is not going to be

easy. It’s working with LOTS of numberseasy. It’s working with LOTS of numbers

Practice! Practice! Practice! That’s the only Practice! Practice! Practice! That’s the only way you will stay aheadway you will stay ahead

To stay ahead, you will need to spend about To stay ahead, you will need to spend about 2 - 3 hours per week outside of class2 - 3 hours per week outside of class

OPTIONAL TEXTBOOKOPTIONAL TEXTBOOK Ross, Westerfield & Jordan (RWJ), Ross, Westerfield & Jordan (RWJ),

EssentialsEssentials of Corporate Finance of Corporate Finance

My class notes are based on above textMy class notes are based on above text

Course packet (slides) at Copymart or Course packet (slides) at Copymart or downloaded from course websitedownloaded from course website

REQUIRED CALCULATORREQUIRED CALCULATOR

Financial Calculator - HP-10B or HP-17B Financial Calculator - HP-10B or HP-17B preferredpreferred

Other calculators will not be supportedOther calculators will not be supported Other calculators can be used but you will be Other calculators can be used but you will be

responsible for knowing how to use themresponsible for knowing how to use them

Self-Study from WWWSelf-Study from WWW

You will be required to obtain and understand You will be required to obtain and understand information from WWWinformation from WWW

Details placed on webpage handout related to Details placed on webpage handout related to class topic of the weekclass topic of the week

You will be tested and responsible for You will be tested and responsible for knowing this material for the examknowing this material for the exam

Come prepared in class with answers to self-Come prepared in class with answers to self-study questions. Maybe asked to hand-instudy questions. Maybe asked to hand-in

COURSE GRADECOURSE GRADE

Homework Assignments (4)Homework Assignments (4) 150150

Class presentationClass presentation 5050

Stock Market GameStock Market Game 100100

Attendance and Self-study WWWAttendance and Self-study WWW 5050

Midterm Exams (2)Midterm Exams (2) 400400

Final Exam (comprehensive)Final Exam (comprehensive) 250250

TotalTotal 10001000

Class PresentationsClass Presentations

In groups of 3 studentsIn groups of 3 students Maximum of 10 minutesMaximum of 10 minutes Any finance-related WSJ articleAny finance-related WSJ article

20% choice of article20% choice of article 40% communication of important points,40% communication of important points, 40% new information not in article40% new information not in article

Stock Market GameStock Market Game

Invest in stocks and index mutual fundInvest in stocks and index mutual fund

Follow performance using Internet and Follow performance using Internet and spreadsheetspreadsheet

Evaluate how you did at the end of quarterEvaluate how you did at the end of quarter

Learn about risk and return!Learn about risk and return!

““House” RulesHouse” Rules Rules outlined in the syllabusRules outlined in the syllabus

Attendance is requiredAttendance is required

No makeups, no late submissions, no exceptionsNo makeups, no late submissions, no exceptions

No cheating! You and I have our mutual honor No cheating! You and I have our mutual honor code which you signed and handed incode which you signed and handed in

Class ParticipationClass Participation

Participation is strongly urgedParticipation is strongly urged

Speak up! No question is stupidSpeak up! No question is stupid

Chances are, others are wondering about the Chances are, others are wondering about the same thing - don’t be shy!!same thing - don’t be shy!!

Course OutlineCourse Outline

Intro to securities, markets, and calculating Intro to securities, markets, and calculating returnsreturns

Time Value of MoneyTime Value of Money Bond & Stock ValuationBond & Stock Valuation Capital BudgetingCapital Budgeting Diversification and Capital Asset Pricing Diversification and Capital Asset Pricing

Model (CAPM), WACCModel (CAPM), WACC

Class Web PageClass Web Page

Announcements, handouts, lecture slides all Announcements, handouts, lecture slides all available at:available at:

http://fac-staff.seattleu.edu/kshahhttp://fac-staff.seattleu.edu/kshah

Feel free to use e-mail: Feel free to use e-mail: kshah@seattleu.edukshah@seattleu.edu You must include ‘FINC 340 F06’ in subject You must include ‘FINC 340 F06’ in subject

heading of emails addressed to meheading of emails addressed to me

Intro to Markets & Intro to Markets & SecuritesSecurites

COMMON STOCKCOMMON STOCK

PREFERRED STOCKPREFERRED STOCK

MUTUAL FUNDSMUTUAL FUNDS

Common StockCommon Stock

Residual ClaimResidual Claim Limited LiabilityLimited Liability Right to VoteRight to Vote

Elect Directors, Important IssuesElect Directors, Important Issues Right to DividendsRight to Dividends

Stock Dividends, Splits, Reverse SplitsStock Dividends, Splits, Reverse Splits

Preferred StockPreferred Stock

Fixed DividendsFixed Dividends Cumulative DividendsCumulative Dividends

No VotesNo Votes Limited AppreciationLimited Appreciation

Combines Features of Common Stock and Combines Features of Common Stock and BondsBonds

Stock ValueStock Value

Capital GainsCapital Gains DividendsDividends

FactorsFactors Earnings GrowthEarnings Growth Products & ServicesProducts & Services ManagementManagement Competition & Economic EnvironmentCompetition & Economic Environment

Evaluating StocksEvaluating Stocks

Book ValueBook Value Earnings per ShareEarnings per Share Return on EquityReturn on Equity Payout RatioPayout Ratio

Annual Reports: Bal. Sheet, Inc. StmtsAnnual Reports: Bal. Sheet, Inc. Stmts Quarterly ReportsQuarterly Reports

Trading StocksTrading Stocks

Primary MarketPrimary Market IPOs - Selling stock for the first timeIPOs - Selling stock for the first time Investment banks, underwritersInvestment banks, underwriters ProspectusProspectus

Secondary MarketSecondary Market Organized exchanges and dealer networksOrganized exchanges and dealer networks Trading of previously issued stockTrading of previously issued stock

Trading Stock...Trading Stock... NYSE, Amex, OTC (Nasdaq)NYSE, Amex, OTC (Nasdaq) BrokersBrokers

Full Service, Discount, Deep Discount, On-lineFull Service, Discount, Deep Discount, On-line

DealersDealers Bid - Ask SpreadBid - Ask Spread

LiquidityLiquidity

Types of TransactionTypes of Transaction

Buying with CashBuying with Cash Buying on MarginBuying on Margin

Borrowing part of purchase amount from brokerBorrowing part of purchase amount from broker Short SellingShort Selling

Borrowing stock, selling, buying back later, Borrowing stock, selling, buying back later, returning borrowed stockreturning borrowed stock

Types of OrdersTypes of Orders Market OrderMarket Order

whatever is the current price in the marketwhatever is the current price in the market

Limit OrderLimit Order specify the highest price for buyingspecify the highest price for buying specify the lowest price for sellingspecify the lowest price for selling

Stop Loss/Gain Stop Loss/Gain order triggered only at a certain priceorder triggered only at a certain price

Stock QuotationStock Quotation

%chg YTD%chg YTD 52 Weeks Hi Lo52 Weeks Hi Lo SymbolSymbol DivDiv Yld %Yld % PEPE VolVol Daily Hi, Lo, Close, Net ChgDaily Hi, Lo, Close, Net Chg

Market IndicatorsMarket Indicators Dow Jones IndustrialDow Jones Industrial S & P 500S & P 500 Wilshire 5000Wilshire 5000

International TradingInternational Trading Tokyo - NikkeiTokyo - Nikkei London - FTSE ‘Footsie’London - FTSE ‘Footsie’ Frankfurt - DAXFrankfurt - DAX

International InvestingInternational Investing

Today’s markest are global. But it exposes you Today’s markest are global. But it exposes you to:to:

Currency RiskCurrency Risk risk of converting currency back and forthrisk of converting currency back and forth

Political RiskPolitical Risk appropriation, nationalizations, confiscation by foreign appropriation, nationalizations, confiscation by foreign

governmentsgovernments

Mutual FundsMutual Funds

Professional money managers investing on Professional money managers investing on behalf of other investorsbehalf of other investors

Investors buy Investors buy sharesshares of mutual funds of mutual funds Shares represent a claim on the investment Shares represent a claim on the investment

portfolio of mutual fundsportfolio of mutual funds Mutual funds can invest in stocks, bonds, real Mutual funds can invest in stocks, bonds, real

estate, gold, etc. etc.estate, gold, etc. etc.

Types of Mutual FundsTypes of Mutual Funds

Closed-end FundClosed-end Fund

Open-end FundOpen-end Fund

Closed-End FundsClosed-End Funds

Shares are sold, and money raised only onceShares are sold, and money raised only once i.e., fixed number of shares outstandingi.e., fixed number of shares outstanding

Investors may buy/sell closed-end fund shares Investors may buy/sell closed-end fund shares on exchanges like any other company shareson exchanges like any other company shares Subsequent buying/selling among investors does Subsequent buying/selling among investors does

not bring in/take out money from fundnot bring in/take out money from fund

Closed-end Funds...Closed-end Funds...

Shares can sell at a Shares can sell at a premiumpremium or a or a discountdiscount from the per share net asset value (NAV) of from the per share net asset value (NAV) of the portfolio (after accounting for expenses for the portfolio (after accounting for expenses for operating the fund)operating the fund)

Reasons for premium/discount is not well Reasons for premium/discount is not well understoodunderstood

Open-End FundsOpen-End Funds

Continuously issue/redeem shares to/from Continuously issue/redeem shares to/from shareholdersshareholders

Potentially unlimited # of sharesPotentially unlimited # of shares Investors buy/sell shares from the mutual fund Investors buy/sell shares from the mutual fund

companycompany Never sells at a premium or a discountNever sells at a premium or a discount

Load v/s No-Load FundsLoad v/s No-Load Funds

No-Load FundsNo-Load Funds: no sales commission: no sales commission typically bought directly from fund mgmt typically bought directly from fund mgmt

company at NAVcompany at NAV can be bought from brokers e.g. Schwabcan be bought from brokers e.g. Schwab

Load FundsLoad Funds: charge sales commission: charge sales commission sold through brokers or directly from fundsold through brokers or directly from fund loads range around 3 to 5% - split between broker loads range around 3 to 5% - split between broker

& fund& fund

Fund ExpensesFund Expenses

Separate from sales loadsSeparate from sales loads Compensation for managing the fundCompensation for managing the fund Range from .2 to 2.5%Range from .2 to 2.5% 12b-1 charges: SEC permitted use of fund 12b-1 charges: SEC permitted use of fund

assets for sales promotion, advertising, assets for sales promotion, advertising, brokerage commissionbrokerage commission

Fund StylesFund Styles

Stock FundsStock Funds

Bond FundsBond Funds

Money Market FundsMoney Market Funds

Index FundsIndex Funds

Stock FundsStock Funds

Growth vs. IncomeGrowth vs. Income

Sector FundsSector Funds e.g. Hi-Tech, Health Care, Gold etc.e.g. Hi-Tech, Health Care, Gold etc.

International FundsInternational Funds World, Europe, Asia, Latin America etc.World, Europe, Asia, Latin America etc.

Bond FundsBond Funds

L. T. Gov’t SecuritiesL. T. Gov’t Securities very low riskvery low risk

Municipal SecuritiesMunicipal Securities Tax exemptTax exempt

CorporateCorporate High-grade, Junk Bond etc.High-grade, Junk Bond etc.

Index FundsIndex Funds

Passive ManagementPassive Management try to track performance of popular indexestry to track performance of popular indexes

Very low expensesVery low expenses Good vehicle for diversificationGood vehicle for diversification Available for most popular stock and bond Available for most popular stock and bond

indexesindexes

Fund FactsFund Facts

Most fund managers have have a hard time Most fund managers have have a hard time beating a passive indexing strategybeating a passive indexing strategy

No systematic difference in performance No systematic difference in performance between Load & No-load fundsbetween Load & No-load funds why pay load???why pay load???

Index funds have very low operating Index funds have very low operating expensesexpenses

e.g. Vanguard Index 500: .19%e.g. Vanguard Index 500: .19%

PREVIEWPREVIEW

ReturnsReturns

ReturnsReturns Returns are earned in 2 forms:Returns are earned in 2 forms:

DividendsDividends Cash distributionCash distribution

Capital Gains or LossesCapital Gains or Losses Rise or fall in stock valueRise or fall in stock value

Total $ Return = Div. Inc. + Cap. Gain (loss)Total $ Return = Div. Inc. + Cap. Gain (loss)

Measuring ReturnsMeasuring Returns

Dollar ReturnsDollar Returns

Percentage ReturnsPercentage Returns

Dollar ReturnsDollar Returns

Example:Example:

Buy 100 shares of Caterpillar at $55. Buy 100 shares of Caterpillar at $55. Dividends over the year are $1.40. Sell the Dividends over the year are $1.40. Sell the shares at 60.shares at 60.

Dollar Return?Dollar Return? % Return?% Return?

ANOTHER EXAMPLEANOTHER EXAMPLE

Buy 100 shares of Microsoft at $140. No Buy 100 shares of Microsoft at $140. No dividends are paid. Sell Shares at $131.dividends are paid. Sell Shares at $131.

Dollar Returns?Dollar Returns? % Returns?% Returns?